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The Mortgage Lender’s Next Legal Battlefield

By Rick Grant

In the years since the financial crash of 2007-08, financial services firms involved in the home finance industry have spent billions on legal fees and financial settlements stemming from their business activities prior to the meltdown. To those of us on the sidelines, it seemed like the government had turned these institutions into its private piggy banks, pulling out funds at will in the name of redressing wrongs done to taxpayers, with little of the proceeds ever finding its way back into the pockets of the consumers who had lost their homes and fortunes.

As those days draw to a close, with long-time Bureau Director Richard Cordray preparing to leave the CFPB to head back to Ohio and the Trump Administration poised to gut the Bureau with a financial scalpel, some bankers may finally be sleeping well at night. They won’t be for long.

Philadelphia was the first US city to take advantage of a new Supreme Court ruling allowing cities to sue mortgage lenders for negative impacts suffered during the downturn. The result is that Philly is suing Wells Fargo for discriminatory mortgage lending and the costs the city incurred because of it. It’s unlikely that Philly will be the last to take advantage of this opportunity. The question is, if the city wins, will Wells Fargo begin to collapse as other cities around the country pile on?

Banks find themselves in dangerous territory
The Supreme Court case that opened the door for this new round of mortgage-related bank settlements was Miami vs. Wells Fargo and Bank of America. Miami alleged that by predatory lending to minorities, these institutions cost the city money, in various ways. Miami felt its residents were owed reparations for actions it alleged led directly to the financial crisis of 2008.

The city further claimed that such a large number of foreclosures has led to lower property tax revenue and overall lower property values that together left Miami struggling. By reverse redlining, Miami contends, the lenders discriminated against its residents by lending to them at higher fees and rates than borrowers living in other areas.

The Supreme Court ruling of 5-3, however, only stated that Miami does have the right to sue, not whether they have created a causality chain between those lending practices and the resultant costs to the city. The court remanded the case back to the US 11th Circuit Court of Appeals in Atlanta where Miami will have to fight that battle. But at least it gets the chance to do so, which has opened the gates for other cities to follow suit.

Lending in a land of restless natives
The question now is whether we’ll see a flood of related lawsuits. Cities around the nation may feel they can prove that discriminatory lending took place which led to monetary losses. Every lawsuit could cost a lender millions of dollars, even if they don’t lose. For Wells, this comes on the heels of consumer outrage over its checking account scandal and the fact that it has helped fund unpopular oil pipeline projects.

In Philadelphia’s case, the city alleges that because Wells Fargo specifically targeted African-Americans and Hispanic borrowers and pushed them toward higher interest rate loans, even when their credit was good enough for a lower cost loan, they discriminated against those borrowers. In addition, the city alleges that Wells promoted loans that included lender paid closing costs in the knowledge that the bank would profit from servicing borrower who could not really afford a loan.

Philadelphia alleges that 23.3% of the loans Wells sold to minorities were high-risk or high-cost while only 7.6% of loans it sold to white customers were the same. Philadelphia alleges that African-American and Hispanic minorities with FICO scores over 660 were more than twice as likely to have high-risk or high-cost loans.

What will likely happen next
If Miami or Philadelphia wins their case, we could see massive settlements in cases brought against the nation’s largest lenders. Cities across the country will lawyer up in search of compensation, which will naturally lead to redlining by their attorneys with the impact being felt disproportionally by the nation’s largest financial institutions. When attorneys navigate, their compasses point only to the deepest pockets.

In response, banks will be forced to unleash their lobbyists in the hope that an Administration that has paid lip service to reducing regulation will be forgiving to institutions that have allegedly been overly aggressive in their pursuit of profit at the expense of a minority population that is currently being protected by an organization the Administration is currently working hard to declaw.

It seems very difficult to imagine that a president who made his fortune in the real estate game will find the banks’ activities to be abhorrent. President Trump is more than willing to use executive orders and it’s not difficult to imagine such a directive being written in the guise of protecting the nation’s banks from punitive actions taken by those the Administration might consider the financial losers in a business game. It must also be noted that we’ve seen court action taken to roll back such orders.

All of this makes it difficult to predict what will happen next. Still, a key maxim of military strategy is to move quickly, secure the high ground and then strike before your enemy has time to develop an effective counter strategy. Cities intent on exercising the new power the Supreme Court has seen fit to bestow upon them would be well advised to consider that.